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BANK OF JAMAICA

Quarterly Monetary Policy Report July to September 2015 • Volume 16 • Number 2

Overview

During the September 2015 quarter, the Bank of Jamaica (BOJ) reduced the rate on the 30-day Certificate

of Deposit (CD) to 5.25 per cent from 5.50 per cent at end June 2015, the second adjustment since the

beginning of the fiscal year. The easing of the monetary policy stance continued to reflect the lowering of

inflation expectations, improvements in the country’s macroeconomic conditions and the Bank’s outlook

for lower domestic inflation in the near- and medium-term. In addition, and consistent with the more

accommodative monetary policy stance, the Bank reduced the spread on its lending facilities relative to

the 30-day CD rate by a further 75 basis points (bps) over the review quarter.

Headline inflation at end-September 2015 decelerated to 1.8 per cent relative to 4.4 per cent at the end of

the preceding quarter. This reduction was in line with the general trend decline that has been observed since

the September 2013 quarter. The reduction largely reflected declines in the cost associated with energy

and transport, while agriculture and processed foods prices increased at a slower pace. Notably, core

inflation continued to decelerate in September 2015 quarter, representing the fourth consecutive quarter

of moderation. Inflation is expected to pick-up in both the December 2015 and March 2016 quarters to

end the fiscal year within the target range of 5.5 per cent to 7.5 per cent. This outlook is predominantly

informed by the projection of moderate increases in international commodity prices for the remainder of

the fiscal year.

Real economic output for the September 2015 quarter is assessed to have expanded within the range of

1.0 per cent to 2.0 per cent, following two consecutive quarters of expansion. The estimated outturn for the

review quarter mainly reflects the performance of the goods producing industries, in particular Agriculture,

Forestry & Fishing and Manufacture. In addition, Hotels & Restaurants is assessed to have been the driver

for growth within the services industry. With regard to aggregate demand the improvement is primarily

associated with net external demand. Real GDP growth for FY2015/16 is projected to remain in the range

of 1.0 per cent to 2.0 per cent, with the pace of expansion increasing over the medium-term. This outlook

is predicated on the continued recovery in the economies of Jamaica’s major trading partners, expected

improvements in business and consumer confidence as well as further gains in external competitiveness,

which is expected to stimulate net external demand.

For the September 2015 quarter, private sector expectations for inflation 12 months ahead remain well

anchored in single digit territory. In the context of relatively low inflation expectations coupled with the

strong evidence of reduced exchange rate pass-through to inflation, it is anticipated that movements in

the exchange rate will gradually decline in importance as a nominal anchor for inflation. Further, as the

benefits of the current economic reform programme become entrenched, as is being observed in low and

stable nominal interest rates, the pick-up in private sector credit and expansion in the stock market, this

should continue to bolster the prospects for new investments and overall output expansion. Concurrently,

improvements in the current account and private capital inflows including foreign direct investments should

continue to underpin stability in Jamaica’s external accounts. In this regard, against the backdrop of the

significantly lowered risks to meeting the monetary targets over the near-term, the Bank will continue to

implement policy to support the entrenchment of low and stable inflation over the near- to- medium term.

Brian Wynter

Governor

CONTENTS

1.0 Inflation 9

Inflation Developments 9

Inflation Outlook & Forecast 11

Box 1.2: Inflation Differential 16

2.0 International Economy 17

Trends in the Global Economy 17

Advanced Economies 18

International Financial Markets 20

Commodity Prices 21

The Implications for the Jamaican Economy 23

3.0 Jamaican Economy 24

Real Sector Developments 24

Aggregate Supply 24

Aggregate Demand 27

Real Sector Outlook 28

Box 2: Trends in selected measures of Labour Productivity 29

Monetary Policy, Money and Financial Markets 30

Monetary Policy 30

Financial Markets 31

Foreign Exchange Market 31

Equities Market 32

Private Sector Credit and Lending Rates 34

Money 36

Box 3: Credit Conditions Survey 38

Fiscal Developments 40

Box 4: Jamaica’s Macroeconomic Programme under the EFF 42

4.0 Implications for Monetary Policy 44

Main Policy Considerations 44

Prices and Output 44

Expectations 44

Financial Markets 45

Monetary Targets 45

Box 5: Monetary Policy Transmission 45

Monetary Policy 46

Additional Tables 47

Glossary 60

List of Boxes 64

ABBREVIATIONS

ARMI Agricultural Raw Materials Index

BOC Bank of Canada

BOJ Bank of Jamaica

BoJ Bank of Japan

BRO Bi-monthly repurchase operations

bps Basis points

CDI Credit Demand Index

ECB European Central Bank

EFF Extended Fund Facility

EFR Excess funds rate

EMBI+ JP Morgan Emerging Market Bond Index

EPI Export Price Index

Fed Federal Reserve Bank

FOMC Federal Open Market Committee

FY Fiscal Year

GDP Gross Domestic Product

GOJ Government of Jamaica

GOJGBs Government of Jamaica Global Bonds

IES Inflation Expeactations Survey

IMF International Monetary Fund

IPI Import Price Index

JCC Jamaica Chamber of Commerce

JSE Jamaica Stock Exchange

LME London Metal Exchange

NDA Net Domestic Assets

NIR Net International Reserve

OMO Open Market Operations

PBOC People’s Bank of China

QCCS Quarterly Credit Condition Survey

QPC Quantitative Performance Criteria

SCT Special Consumption Tax

SDRs Special Drawing Rights

SLF Standing Liquidity Facility

SMEs Small and Medium-sized Enterprises

TAJ Tax Administration of Jamaica

TOT Terms of Trade

USA United States of America

USDA United States Department of Agriculture

WTI West Texas Intermediate

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Quarterly Monetary Policy Report July to September 2015

Inflation Developments

At end-September 2015 headline inflation

decelerated to 1.8 per cent, the lowest since 1967,

relative to 4.4 per cent at the end of the preceding

quarter. The outturn is below the target range of 5.5

per cent to 7.5 per cent for the current fiscal year

(see Table 1 and Box 1). This reduction in inflation

was in line with the general trend decline that has

been observed since the September 2013 quarter.

The reduction largely reflected declines in the cost

associated with energy and transport. The cost

for agriculture and processed food increased at a

slower pace relative to the preceding quarter (see

Figure 1). With regard to core inflation, the outturn

of 4.0 per cent represents the fourth consecutive

quarter of deceleration. Inflation among agricultural food items moderated

relative to the June quarter, in spite of reductions

in the supplies of most domestic agricultural

commodities (see Figure 2). This is notwithstanding

the marked increases in the prices of vegetables

and starchy foods in the review quarter, as a result

of the decline in supplies.

Table 1 Inflation and Major Components

(Annual point-to-point per cent change)

Headline Core* FNB** HWEG** Sep-14 9.0 6.7 12.5 6.2

Dec-14 6.4 6.0 10.1 -2.0

Mar-15 4.0 5.5 7.9 -9.5

Jun-15 4.4 4.8 7.8 -7.5

Sep-15 1.8 4.0 5.5 -10.9

FY15/16 5.5-7.5

Source: STATIN & BOJ Notes: [*] Core inflation represents that portion of headline inflation that excludes the influence of agriculture and energy related services such as electricity and transport. [**] FNB (Food & Non-Alcoholic Beverages) and HWEG (Housing, Water, Electricity Gas & Other Fuels) are major components of the Consumer Price Index (CPI) basket.

Figure 1 Component Contributions to Inflation

(Annual point-to-point per cent change)

Source: STATIN & BOJ

1.0 Inflation Consistent with the Bank’s forecast, inflation decelerated for the September 2015 quarter relative to the

June 2015 quarter. This reduction mainly reflected a decline in energy and transport prices as well as a

moderation in price changes among processed food items. Inflation for the FY2015/16 will be within the

5.5 per cent - 7.5 per cent target range. Over the next four quarters, the Bank is projecting inflation to

be within the range of 4.5 per cent to 6.5 per cent. This forecast is largely predicated on international

commodity prices remaining at moderate, though increasing, levels throughout the rest of the fiscal year.

Inflationary impulses are also expected to emanate from a measured improvement in domestic demand

conditions over this period. This improvement is underpinned by an anticipated increase in consumption

during the upcoming quarter which is expected to continue in subsequent quarters. Adverse weather

conditions remain the main upside risk to the inflation outturn over the next four quarters. The downside

risks principally relate to lower than anticipated international commodity prices and weaker than expected

domestic demand conditions. In light of these factors the near-term risks to the forecast are considered

to be balanced.

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July to September 2015

Quarterly Monetary Policy Report

of some pass-through from exchange rate

depreciation (see Figure 3).

Price declines in electricity and fuel resulted in

deflation in energy and transport for the September

2015 quarter, largely reflecting the impact of the

reduction in crude oil prices (see Figure 5 and

International Economy). It should be noted that

these declines were in contrast to the increases in

Declines in international grains prices underpinned

the abatement in inflation among processed foods

for the fourth consecutive quarter. The decline in

international grains prices was largely due to the

increase in crop yield in major harvesting regions

arising from favourable weather conditions.

Notwithstanding the moderation in processed food

inflation, this category has remained the major

contributor to inflation since the September 2014

quarter (see Figures 1 and 4).

Inflation emanating from other services was

marginally higher when compared to the previous

quarter. This outturn for the review quarter mainly

reflected the seasonal impact of demand related

to back-to-school expenses as well as the impact

Figure 4 Imported Agriculture Price Indices

(Base year = March 2008)

Source: Bloomberg & BOJ Calculations Grain prices represent a weighted average of wheat, corn and rice.

Figure 3 Inflation from Processed Foods and Non-

Energy Services relative to annual depreciation (per

cent)

Source: Bank of Jamaica Exchange rate depreciation up to one year (4-quarters) in the past has displayed a positive correlation with processed food inflation and other services inflation (non-energy related). With respect to non-energy related services there was a correlation of 0.72 at a lag of four (4) quarters. When matched against inflation from processed foods, exchange rate depreication reflects its largest correlation of 0.56 which occurred within three (3) months.

Figure 2 Estimated Vegetable & Starchy Foods

Supplies (Tonnes)

Source: RADA

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crude oil prices in the previous quarter.

Similar to the previous eleven quarters, there were

no inflationary pressures from capacity utilization

or the labour market during the quarter under

review (see Figure 6). In particular, the output gap

remained negative for the September 2015 quarter.

Furthermore, the gap between the unemployment

rate and the Non-Accelerating Inflation Rate of

Figure 5 Energy Price Indices

(Base year = March 2008)

Source: Bank of Jamaica

Figure 6 Output Gap and Gap between Unemployment

and NAIRU

Source: Bank of Jamaica The above chart presents the output gap, the gap between actual output and potential, and the NAIRU gap, the gap between Unemployment and the Non-Accelerating Inflation Rate of Unemployment (NAIRU). When output is below potential (negative output gap) inflationary pressures are negative due to economic slack. When unemployment exceeds the NAIRU (positive NAIRU gap), there is also slack in the labour market contributing to low wages and by extension, low inflationary pressures.

Unemployment (NAIRU) suggested no inflationary

pressures from the labour market. In light of

the aforementioned, there were no inflationary

pressures from factor prices, especially wages

during the quarter.

Inflation Outlook & Forecasts

Inflation is expected to pick-up in both the

December 2015 and March 2016 quarters to end

fiscal FY2015/16 within the target range of 5.5 per

cent to 7.5 per cent. This forecast is predicated

on increases in the prices of domestic agricultural

commodities due to the recent dry conditions as

well as an uptick in the price of crude oil. However,

inflation from agricultural commodities is expected

to abate in the latter part of the December 2015

quarter with price reversals in the March 2016

quarter as the Island recovers from the drought

conditions.

The prices of international commodities,

particularly crude oil, are projected to reflect some

modest increases, starting in the December 2015

quarter, contributing to an increase in domestic

inflation over the near-term. This projected rise

is predicated on a gradual improvement in global

demand conditions as well as a reduction in shale

production by the United States of America.

The output gap is projected to narrow over the

near-term despite remaining negative. In this

regard, minimal inflationary pressures are likely

to emanate from domestic demand conditions.

Likewise, growth in the monetary aggregates

continue to pose no substantial threat to inflation

over the short term (see Monetary Developments).

In addition, continued low inflation expectations

as reflected in the Bank’s most recent Inflation

Expectations Survey (IES) of businesses, should

assist in tempering price increases (see Box 1.1:

BOJ’s Inflation Expectations Survey (IES)).

Inflation over the subsequent four quarters is

projected, on average, to be within the range of

4.5 per cent to 6.5 per cent. This forecast is

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Box 1.0: BOJ’s Macroeconomic Model (MonMod)

Component contribution to Inflation implied by the

Phillips Curve

The Bank’s Macroeconomic Model (MonMod)

evaluates the determination of inflation in the

economy using the theoretical underpinnings of a

forward looking open economy Phillips Curve. In

that regard, the key determinants include (1) the

surplus or shortage of aggregate supply (output

GAP); (2) the impact of imported inflation and (3)

expectations among consumers and businesses.

Notably, expectations are modeled as both adaptive

(backward looking) and rational (forward looking)

(see Phillips Curve equation below).

𝛑𝛑𝐭𝐭 = 𝛂𝛂𝛑𝛑𝐭𝐭−𝟏𝟏 + (𝟏𝟏 − 𝛂𝛂)𝛑𝛑𝐭𝐭+𝟏𝟏 + 𝛃𝛃𝟏𝟏𝐆𝐆𝐆𝐆𝐏𝐏𝐭𝐭 + 𝛃𝛃𝟐𝟐𝐒𝐒𝐭𝐭 + 𝛜𝛜𝐭𝐭

Where is the Inflation rate at a given point in time, is the corresponding output gap and is

a composite of the exchange rate change and US

inflation. Unexplained inflation is captured in .

The Bank’s MonMod was reestimated in October

2015 taking into account the inflation outturn of 1.8

per cent for the September 2015 quarter (see Figure

below). The results from the model suggested that

inflation would have accelerated during the quarter

due primarily to an uptick in inflation expectations.

However, imported inflation remained largely

predicated on the

projection for modest increases in international

commodity prices, a strengthening in domestic

economic growth and the impact of continued

fiscal discipline in addition to a supportive monetary

policy stance. It should be noted that the forecast

range was unchanged from the end-June 2015

quater.

Inflation Risks

The upside risks to inflation over the next four

quarters include an intensification of adverse

weather conditions and higher than anticipated

international commodity prices. The downside

risks relate to lower than projected international

commodity prices and weaker domestic demand

conditions. In this regard, the BOJ perceives the

near-term risks to this forecast to be balanced

(see Figure 8).

πt GAPt St

𝜖𝜖𝑡𝑡

Figure 7 Inflation Forecast Performance

(Annual Inflation forecast for each fiscal year)

Source: Bank of Jamaica The graph reflects how well the Bank’s forecasts of inflation compare to the actual inflation outturn for each quarter ahead. Fiscal year targets are also provided to indicate what the targets were at any given point in time.

Figure 8 Inflation Fan

(Annual Inflation forecast)


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unchanged while domestic demand conditions

continued to be weak evidenced by the negative

output gap. In addition the results from the model

showed a substantial decline in the residual for

the September 2015 quarter. This result primarily

reflected the non-reoccurence of the transport

shock in the comparable quarter of 2014.

In the December 2015 quarter, inflation is projected

to accelerate, primarily reflecting a normalization.

Consequent on an uptick in inflation expectations

and a narrowing in the output gap, inflation is

projected to increase over the remaining quarters

of FY2015/16.

Box 1.1: BOJ’s Inflation Expectations Survey (IES)

Overview

In September 2015, the results from the IES

showed a decline in expected inflation 12 months

ahead relative to the June 2015 survey. The

perception of inflation control also declined relative

to the previous quarter. Despite this, there has

been a general upward trend in the index which

has been observed since the March 2014 quarter.

With regard to the exchange rate, respondents

expected an acceleration in the pace of currency

depreciation over all three horizons. The majority

of businesses surveyed believed that the Bank’s

OMO rate will remain the same over the next three

months. Relative to June 2015, the perception

of present and future business conditions both

declined. Notably, perceptions of both present and

future business conditions have generally trended

upwards since the June 2013 quarter.

Inflation Expectations

In the September 2015 survey, there was an uptick

in the expected inflation for CY2015 to 7.3 per cent

from the 7.2 per cent that was recorded in the June

2015 survey. Expected inflation for the calendar

year was above the BOJ’s forecast. Respondents’

expectation of inflation 12 months ahead, however,

declined to 4.6 per cent in the September 2015

survey from 5.2 per cent recorded in June 2015 (see

Figure 1). In particular respondents’ expectation of

inflation for September 2016 was below the Bank’s

forecast for that period.

Perception of Inflation Control

The index of inflation control declined to 220.0

from 235.8 in the June 2015 survey (see Figure

2). This result mainly reflected a decline in the

number of respondents who were ‘satisfied’

and ‘very satisfied’ with the authorities’ control

of inflation. Additionally, there was a rise in the

number of respondents who were neither ‘satisfied’

nor ‘dissatisfied’.

Figure 1: Expected 12-Month Ahead Inflation

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Exchange Rate ExpectationsRelative to the June 2015 survey, the respondents

expected an increase in the pace of currency

depreciation over the 3-month and 6-month

horizons while anticipating a slow down in the pace

of depreciation over the 12-month time horizon

(see Table 1).

Interest Rate Expectations: OMO Rate The expected 180-day Treasury Bill (T-Bill) rate,

three months hence, declined to 6.5 per cent from

6.6 per cent reported in the June 2015 survey. This

expectation was slightly above the actual 180-day

T-Bill rate for August 2015

Perception of Present and Future Business

Conditions In the most recent survey the perceptions of present

business conditions improved while the perception

of future business conditions declined relative to

the June 2015 survey. However, since the June

2013 quarter, perceptions of both present and

future business conditions have generally trended

upwards (see Figures 3 and 4)

Expected Increase in Operating Expenses

Respondents indicated that they expect the largest

increase in production costs over the next 12

months to emanate from higher costs for utilities.

The cost of stock replacement was expected to be

the second largest contributor to higher production

costs over the next 12 months. Also, the cost

of raw materials was expected to contribute to

higher production costs for the year ahead. Wages

& salaries continued to be the input cost least

expected to increase over the next 12 months.

Figure 2: Perception of Inflation Control Question: How satisfied are you with the way inflation is

being controlled by the Government?

Source: Bank of Jamaica’s Inflation Expectations Survey

Notes: The Index of inflation control is calculated as the number

of satisfied respondents minus the number of dissatisfied

respondents plus 100

Table 1: Exchange Rate Expectations

Question: In July 2015 the exchange rate was

J$117.42=US$1.00. What do you think the rate will be for

the following time periods ahead, 3 months, 6 months and

12 months?

Expected Depreciation Periods Ahead Dec-14 Mar-15 Jun-15 Sep-15

3 Months 1.4 1.7 1.0 1.7

6 Months 2.1 3.0 1.5 2.7

12 Months 3.0 3.8 4.3 3.5

Source: Bank of Jamaica’s Inflation Expectations Survey.

Note: the survey responses to question have been converted

to per cent change.

Figure 3: Present Business Conditions and Real GDP

growth

(Index- LHS and Per cent – RHS)

Source: Bank of Jamaica’s Inflation Expectations

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Box 1.2: Inflation Differential

Background

In April 2013, Jamaica entered into an Extended

Fund Facility (EFF) with the IMF. A medium-

term goal of the economic programme is to

bring inflation in line with that of our main trading

partners, particularly the USA. At the start of the

programme, annual inflation was 9.1 per cent as

at end-March 2013 and was forecast to gradually

decline to 8.5 per cent at end-March 2017.

Concurrently, US inflation was 1.5 per cent and

the IMF forecast inflation of 2.3 per cent. In that

context, the inflation differential was 7.6 per cent

at end-March 2013 and was forecast to gradually

decline to 6.2 per cent at end-March 2017.

Developments

Domestic and Foreign Inflation

Since April 2013, domestic inflation has fallen

much faster than had been expected. This has

been mainly due to favourable supply shocks to

oil and other commodities which contributed to a

significant decline in commodity prices, particularly

towards the end of 2014. In addition, sustained

fiscal consolidation under the EFF programme, a

slow-down in the pass-through of exchange rate

Figure 4: Future Business Conditions and Real

GDP growth (Index)

Source: Bank of Jamaica’s Inflation Expectations Survey

Note: Rates on foreign currency personal loans were not

collected.

depreciation to domestic prices and weaker GDP

growth than previously expected also contributed

to a faster than expected decline in inflation.

Consequently, annual inflation at end-September

2015 was 1.8 per cent.

Inflation in the USA, Jamaica’s main trading

partner, has also declined sharply consequent on

the fall in commodity prices. At end-September

2015, the USA recorded annual inflation of 0.0 per

cent relative to 1.5 per cent at end-March 2013.

Inflation Differential

The faster fall in domestic inflation, relative to

foreign inflation, resulted in a narrowing of the

inflation differential to 1.8 percentage points as at

September 2015 from 7.6 percentage points as

at the start of the EFF programme (see Figure 1).

The differential is, however, expected to normalize

to approximately 5.0 percentage points at end-

March 2016, consistent with the projections for

domestic inflation.

Exchange Rate Response

Concurrent with the fall in the inflation differential,

the annual depreciation of the exchange rate has

slowed to approximately 6.0 per cent at end-

September 2015 from 13.2 per cent at the start

of the EFF programme (see Figure 1). Although,

the rate of depreciation of the exchange rate was

above the inflation differential as at September

2015, the depreciation should moderate as the

inflation differential continues to trend downwards

(see Foreign Exchange Market).

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Figure 1: Inflation Differential and Exchange Rate

Depreciation

- 17 -


Trends in the Global Economy

Global economic output for 2015 is expected to

moderate further to 3.2 per cent, relative to previous

forecasts (see Table 2 and Figure 9). The downward

revision to world growth is largely underpinned by

slower growth in some large economies for the

September quarter, which is anticipated to persist

for the remainder of 2015. Notably, global growth

during the quarter was restrained by the impact

of economic and financial sector weaknesses in

China on several developed and emerging market

economies. Global growth was also affected by the

impact of lower commodity prices on commodity

exporting economies. Against this background,

world growth is estimated to have moderated to

3.3 per cent in the September quarter from 3.6 per

cent in the June quarter.

Notwithstanding the slowdown in global growth,

there was an acceleration in the 12-month point-

to-point inflation for several of Jamaica’s major

trading partners during the quarter, albeit well

below respective inflation targets. For 2015,

most of Jamaica’s trading partners are expected

to record lower inflation, consistent with lower

global demand and the fall in commodity prices,

particularly oil.

In terms of monetary policy, the central

banks of most major economies maintained

an accommodative stance. In particular, the

People’s Bank of China (PBOC), as well as the

Bank of Canada (BOC) implemented additional

2.0 International EconomyFor the September 2015 quarter, growth in the world economy is estimated to have decelerated relative

to the June 2015 quarter. This weaker performance mainly reflected a deceleration in growth within the

US economy and major emerging market economies such as China. Notably, concerns regarding slower

growth in China had a significant adverse impact on global financial markets throughout the quarter. In

particular, heightened uncertainty led to increased demand for safe haven assets such as US Treasury bonds,

contributing to a further strengthening of the US dollar and a fall in dollar-denominated commodity prices.

Lower commodity prices also emanated from a continued increase in global supplies and expectations of

weaker global demand. These developments led the central banks of most major economies to maintain

an accommodative policy stance with some central banks implementing additional measures to stabilize

financial markets and stimulate growth.

Table 1: Overview of Selected Variables (Per Cent)

2014 2015

GDP Actual Current Forecast Previous

Forecast as at 24 Jul. 2015

World 3.4 3.2 3.3

USA 2.4 2.5 2.3

Canada 2.4 1.1 1.3

Japan -0.1 0.7 1.0

UK 3.0 2.6 2.6

Euro 0.9 1.5 1.5

China 7.4 6.8 7.0

Inflation (eop)

USA 0.8 0.5 0.9

Canada 1.5 1.0 1.4

Japan 2.4 0.5 0.8

UK 0.5 0.4 0.9

Euro -0.2 0.5 0.8

China 1.5 2.1 2.5

Source: Bank of Jamaica and Bloomberg

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expansionary policy measures in an effort to

stimulate growth and stabilize economic and

financial conditions (see Figure 10). In contrast,

the Central Bank of Brazil tightened monetary

policy in response to inflationary pressures. In this

context, the Bank of Jamaica (BOJ) anticipates

continued growth of the global economy over the

forthcoming quarters of 2015 and 2016, albeit at a

slower pace than previously envisioned.

Advanced Economies

United States of America

Preliminary estimates published by the Bureau of

Economic Affairs, indicate that for the September

2015 quarter USA real output expanded by 1.5

per cent on an annualized basis, which is lower

than the Bank’s estimated growth of 2.2 per cent

and the previous quarter’s outturn of 3.9 per cent.

The deceleration in real output was underpinned

by a reduction in private inventory investment,

exports, non-residential fixed investment, personal

consumption expenditure, the spending of state and

local government and residential fixed investment.

Notably, export growth for the USA remains a

challenge given the continued strengthening of the

US dollar relative to other major currencies and

weak external demand conditions. In addition,

the impact of low commodity prices curtailed

investment expenditure, particularly in the energy

sector.

Labour market conditions continued to reflect an

improvement as evidenced in a quarterly decline of

0.2 percentage point in the average unemployment

rate to 5.2 per cent (see Table 3). The Bank

anticipates that as the labour market improves,

this effect should translate to increased consumer

spending in the US economy. However, net exports

may exert a downward pull to growth in the near-

term against the background of the relatively strong

US dollar and weak external demand conditions. In

addition, relatively low oil prices could continue to

adversely affect investments. Overall, the Bank is

projecting quarterly annualized growth to be within

the range of 2.2 per cent to 2.8 per cent over the

next four quarters. This should translate to GDP

growth of 2.5 per cent and 2.6 per cent for 2015

and 2016, respectively.

In terms of inflation, at end-September 2015, the

12-month change in the consumer price index

increased to 0.2 per cent, from 0.1 per cent as at

end-June 2015. The outturn reflected higher prices

Figure 9: Global Economic Growth


Figure 10: Policy Interest Rates, monthly data (Per Cent)

Source: Bloomberg

Table 3: Unemployment Rate for Selected Economies

(Quarterly Average Per Cent)

USA Canada Euro

Sep-2014 6.1 6.9 11.5

Dec-2014 5.7 6.6 11.5

Mar-2015 5.5 6.7 11.2

Jun-2015 5.3 6.8 11.1

Sep-2015 5.2 6.9* 11.0*

Source: Official statistics offices, * Bloomberg forecast

- 19 -


an expansionary monetary policy stance until this

target is met.

Canada

Real output in Canada is estimated to have

expanded by 2.2 per cent on an annualized

basis, for the September 2015 quarter, following

a contraction of 0.5 per cent in the June 2015

quarter. The resumption of growth in the September

quarter was largely driven by increased household

spending while exchange rate-sensitive exports

gained momentum due to the depreciation in the

Canadian dollar. It should be noted that on 15 July

2015, the BOC reduced the target for the overnight

rate by 25 bps to 0.5 per cent. This monetary

policy initiative occurred against the background

of the negative impact that the decline in oil prices

has had on investment spending and employment

in the Canadian economy. The policy change is

aniticipted to stimulate growth in Canada in the

near-term.

In the context of lower transportation and energy

costs, headline inflation in Canada is estimated

to have decelerated to 0.9 per cent at end-

September 2015 from 1.0 per cent at end-June

2015. The Bank expects inflation to trend within

the range of 0.9 per cent to 1.8 per cent over

the next four quarters, as growth in the Canadian

economy accelerates within the range of 2.0 per

cent to 2.2 per cent.

China

For China, the expansion in real output for the

September 2015 quarter decelerated to 6.9 per

cent on an annualized basis from 7.0 per cent in

the June 2015 quarter. During the review quarter,

lower growth was largely underpinned by the

impact of continued financial market volatility and

weaker global demand. The slowdown in growth

was mainly reflected in a decline in factory activity.

In an effort to further stimulate growth in the

Chinese economy, the government devalued

the Yuan on 11 August 2015 to facilitate a more

for recreational activities, the impact of which was

partly offset by continued declines in energy costs.

In a context where the Fed’s outlook for inflation

remained below the target rate of 2.0 per cent,

the central bank maintained an accommodative

monetary policy stance during the September

quarter. The BOJ is forecasting that inflation in the

USA for the next four quarters will be within the

range of 0.1 per cent and 0.7 per cent. This is

consistent with the latest projection by the Federal

Open Market Committee (FOMC) for inflation to

remain below its target.

Euro Area

Real output in the Euro area expanded by 1.6 per

cent on an annualized basis, in the review period,

following growth of 1.5 per cent in the June 2015

quarter. The growth for the September 2015 quarter

reflected the impact of expansionary monetary

policy measures implemented by the European

Central Bank (ECB) aimed at improving demand

conditions in the region. The easing of monetary

policy in the Euro area has facilitated a reduction in

bank lending rates and increased access to credit

by Small and Medium-Sized Enterprises (SMEs),

which has resulted in growth in credit to the private

sector. Further, the unemployment rate in the Euro

area moderated marginally to 11.0 per cent for the

September 2015 quarter.

The Bank anticipates that economic activity in the

region will increase marginally for the remainder of

2015 as domestic demand conditions continue to

improve. In light of this, the Euro area is expected

to record growth of 1.5 per cent and 1.6 per cent

in 2015 and 2016, respectively.

Headline CPI inflation in the Euro area was -0.1

per cent at end-September 2015 in contrast to

inflation of 0.2 per cent as at June 2015. This

outturn largely reflected the impact of the decline

in energy prices. The Bank expects inflation to

trend below the target rate of 2.0 per cent for

the next four quarters. It should be noted that the

ECB has indicated its committment to maintain

- 20 -



market-determined exchange rate. However, this

coincided with the heightened volatility in the global

equity and currency markets amidst concerns

of a slowdown in the world’s second largest

economy. In response, the PBOC made several

interventions in the foreign exchange market to

stabilize the Yuan and reduce capital outflows. On

26 August 2015, the PBOC further reduced interest

rates and announced a reduction in the required

reserve ratio to facilitate increased investment in

the stock market and promote economic activity.

Specifically, the PBOC cut its 1-year lending rate

and 1-year deposit rate by 25 bps each to 4.60 per

cent and 1.75 per cent, respectively. The PBOC

announced a reduction in the required reserve ratio

by 50 bps to 18.0 per cent on 06 September 2015.

Against this background, the Bank of Jamaica

projects that economic growth in China for the next

four quarters will be within the range of 6.5 per

cent and 6.8 per cent while inflation is forecast to

be within the range of 1.8 per cent to 2.9 per cent.

International Financial Markets

For the September 2015 quarter, increased volatility

in the global financial market reduced investor

appetite for risk. Notably, there was increased

demand for US Treasury bonds (USTBs) in the

context of the prospects of a slowdown in global

growth associated with adverse developments in

China and expectations of an impending increase

in the Fed Funds rate. In this context, the average

yield on USTBs fell by 26 bps to 1.56 per cent, on

an annual basis mainly reflecting lower yields on

long-term bonds (see Figure 11). On a quarterly

basis, the average yield on USTBs declined by 18

bps. In the context of the foregoing, the quarterly

spread between the 3-month USD LIBOR and the

3-month USTB (TED spread) increased by 4.4 bps

to average 30.5 bps (see Table 4).

With respect to emerging market bonds, the upward

trend in the JP Morgan emerging market bond index

(EMBI+) continued for the quarter. Relative to the

September 2014 quarter, the average yield on the

EMBI+ increased by 72 bps to 6.52 per cent. On

a quarterly basis, the average yield on the EMBI+

rose by 23 bps.

The average yield on Government of Jamaica

global bonds composite index (GOJGBs) reflected

a reversal in the downward trend observed since

December 2013. Notably,the average yield on the

index increased by 61 bps to 6.79 per cent for

the September 2015 quarter. However, the outturn

was 19 bps lower than the average yield for the

September 2014 quarter. The increase in average

yields for the September quarter largely reflected

the impact of reduced preference for risky assets

as well as the impact of the inclusion of the

indicative yields of two GOJ global bonds issued

during the quarter. Against this background, the

spread between GOJGBs and USTBs widened

by 5 bps to 4.69 per cent when compared to the

September 2014 quarter. However, the spread

between the GOJGBs and the EMBI+ narrowed by

92 bps to 0.27 per cent relative to a year ago,

Figure 11: Selected Average Sovereign Bond Yields

(Per Cent)

Source: Bloomberg

Table 3: Average spread between the 3-month

USD LIBOR and the 3-month USTB (TED spread)

Sep - 14 21.5

Dec - 14 21.6

Mar - 15 23.3

Jun - 15 26.1

Sep - 15 30.5

Source: Bloomberg

- 21 -


which is reflective of the higher average yields on

emerging market bond also observed over the

review quarter.

During the quarter, there was a decline in selected

stock market indices largely underpinned by

financial market volality in China. This was the first

reduction recorded since the June 2012 quarter

(see Figure 12). The declines in the September

quarter translated to annual declines of 4.4 per

cent, 2.6 per cent and 0.7 per cent, in the Dow

Jones Industrial Average, the S&P 500 and the

Eurofirst 300 indices, respectively.

With respect to the performance of selected

currencies, there was a general depreciation of

most of the major currencies against the US dollar

on both an annual and quarterly basis. For the

September 2015 quarter, the US dollar index

increased by 0.9 per cent and 15.7 per cent

when compared to the June 2015 quarter and the

September 2014 quarter.1 This was sparked by

the devaluation of the Chinese Yuan by the PBOC

in August 2015. This subsequently led to significant

depreciations in the currencies of other emerging

market countries given fears of a slowdown in

China and the possible spillover effect on these

1 The US Dollar Index (USDX) is computed by the Intercontinental

Exchange Futures, U.S., which uses the euro, Japanese yen,

Canadian dollar, British pound, Swedish krona and Swiss franc

exchange rates relative to the US dollar, supplied by approximately

500 banks.

economies. Further, there was reduced demand

for emerging market curriences as the adverse

financial and economic developments in China

led to capital outflows from these economies.

As a result, the currencies of some advanced

economies such as the USA, Euro area and Japan

appreciated in the review quarter, as investors

sought safe haven assets.

Commodity Prices

Selected commodity prices declined during the

September 2015 quarter, largely reflecting the

impact of buoyant supplies, relatively weak global

economic and market fundamentals coupled with

a stronger US dollar. The Bank’s Fuel Sub-Index

felll by 52.2 per cent on an annual basis to an

average price of US$46.44 per barrel.2 Lower

prices for West Texas Intermediate (WTI) crude oil

were largely as a result of the persistent oversupply

of crude oil on the international market. The

downward pressure on oil prices during the quarter

stemmed largely from the continued growth in

shale oil production in the USA. Record crude oil

production and exports from Iraq. The expectation

of additional supplies from Iran by January 2016

also contributed to lower prices. The growth in

2 Relative to the previous quarter, prices fell by 19.9 per cent.

Figure 12: Selected Stock Market Indices (Per cent)

Source: Bloomberg

Figure 13: The Bank’s Commodity Price Indices

Sources: Bloomberg, World Bank and BOJ

- 22 -



crude oil production in the USA was supported by

increased drilling activities as a number of oil rigs

that were idle over previous quarters were returned

to the fields.3

Similarly, the Bank’s Agricultural Raw Material Index

(ARMI) reflected lower prices across all categories

of grains against the background of buoyant

supplies and weaker global demand conditions

during the review quarter. Reports from the United

States Department of Agriculture (USDA) explained

that the robust supplies of grains in the market

were supported by excellent growing conditions for

corn and soybean in the USA, as well as increased

wheat production from the European Union (EU)

and the Former Soviet Union area. In addition, the

expectation of increased productivity in Brazil was

anticipated to further add to supplies of soybean

in the near term following the implementation of

structural reforms and the conversion of some

pasture land for use as cropland. In terms of

demand, lower agricultural commodity prices were

also underpinned by the expectation that the slower

growth in China, the second largest commodity

importing country, would result in excess grains on

the market. In addition, demand for commodities,

which are denominated in US dollars, fell against

the background of the appreciation of the US dollar,

which made investments in these commodities

more expensive. In the context of the foregoing,

the ARMI declined by 14.5 per cent and 3.7 per

cent when compared to the September 2014 and

June 2015 quarters, respectively (see Figure 13).

Aluminium prices on the London Metal Exchange

(LME) declined by 19.4 per cent relative to

September 2014 and fell by 9.5 per cent on

a quarterly basis. These declines were largely

influenced by the relatively weaker demand

conditions and buoyant supplies during the quarter.

In particular, lower prices were largely attributed

to (i) persistent stock overhang of aluminium, (ii)

3 Rig count data for the USA, as published by Baker Hughes,

indicated that July and August 2015 were the only months that

accounted for an increase since the start of 2015.

appreciation of the US dollar, (iii) reduced cost of

production given the lower energy prices and (iv)

softer demand from China.

In terms of the outlook for commodity prices for the

next four quarters, crude oil prices are projected to

increase, but remain below US$60.00 per barrel,

on average. This trajectory is primarily informed

by the expected gradual improvement in global

demand conditions and the forecast from the

International Energy Agency for a reduction in shale

oil production. However, this impact is anticipated

to be partly constrained by the expectation of

additional supplies of crude oil, particularly from

Iran in early 2016.

Similarly, aluminium prices are projected to trend

upwards, albeit at a slower pace than previously

projected. This is primarily associated with the

anticipated pick-up in demand from some

advanced economies such as the Euro area.

However, this impact is expected to be partly

offset by the anticipation of buoyant supplies as

China, the world’s largest producer, maintains

its production levels in the context of an already

oversupplied market.

In terms of agricultural commodities, prices are

forecast to increase over the next four quarters

but at a more tempered pace relative to previous

projections. This downward revision takes into

account the current oversupply of grains and the

prospect of further buoyant yields. In addition, the

relative strength of the US dollar is expected to

have a restraining impact on commodity prices for

the remainder of the fiscal year. However, as the

global economy strengthens, improved demand

conditions should place some upward pressure

on prices to facilitate a slight upward trend in the

average price of grains by mid-2016. In addition,

the adverse impact of El Niño weather conditions

on supplies from major grain-producing countries

may contribute to higher prices.

- 23 -


The Implications for the Jamaican Economy

Jamaica’s terms of trade (TOT) index strengthened

for the September 2015 quarter as the developments

in the global economic and financial environments

continued to support strong declines in import

prices. For the review quarter, the index increased

by 33.8 per cent and 2.6 per cent relative to the

comparable period in 2014 and the June 2015

quarter, respectively. This improvement mainly

reflected a reduction of 28.6 per cent in the Import

Price Index (IPI), the impact of which was partially

offset by a decline of 4.4 per cent in the Export

Price Index (EPI).

When compared to the previous quarter, the

estimated decline in the IPI was largely attributed

to the impact of the continued decline in the prices

of crude oil and grains. The lower EPI mainly

reflected a weakening of alumina prices supported

by lower implicit tourism prices due to reduced

tourism travel, the impact of which was partly

offset by higher coffee and sugar prices.4

The TOT is projected to maintain its increasing trend

over the next four quarters, albeit at a moderate

pace. This continued improvement is underpinned

by the assumption for a notable recovery in the

EPI for the March 2016 quarter, supported by a

mild upward trend in import prices. Consistent

with the expectation that a number of advanced

and emerging market economies will continue

to expand into 2016, prices in the international

commodities market are expected to rise, though

slowly, as global demand strengthens.

In light of the forecast of relatively higher

international commodity prices, domestic inflation

is expected to trend upwards over the next

four quarters. Further, growth in the Jamaican

economy is expected to strengthen against the

background of continued improvement in the US

labour market, which should support continued

growth in inflows from tourism and remittances. In

4 The price of aluminium is used as a proxy for alumina prices.

addition, the successful economic performance of

the Government is expected to continue to attract

foreign direct investments, which should bode well

for growth in the domestic economy.

- 24 -



Real Sector Developments

Aggregate Supply

Estimates of real economic activity indicated a

pick-up in economic growth for the September

2015 quarter, with most industries assessed

to have expanded, with the exception of Mining

& Quarrying. Growth for the review period was

assessed within the range of 1.0 per cent to 2.0

per cent, following an expansion of 0.6 per cent

for the June 2015 quarter (see Figure 14 and Table

5).

The expansion in the economy reflected growth in

both tradable and non-tradable industries for the

review period (see Figure 15). For the quarter, a

faster pace of expansion was registered in non-

tradable industries when compared to growth in

3.0 Jamaican EconomyReal economic output for the September 2015 quarter is estimated to have increased for the third

consecutive quarter. The estimated expansion in the economy primarily reflected the recovery from

production disruptions experienced in the comparable period of 2014 as well as continued improvements

in the economies of Jamaica’s major trading partners. These developments have positively influenced the

performance of Agriculture, Forestry & Fishing, Hotels & Restaurants, Transport, Storage & Communication

and Construction industries for the review period. Further, demand has improved, evidenced by growth

in Final Consumption, Net External Demand as well as Gross Capital Formation. For the FY2015/16, real

economic activity is projected to grow within the range of 1.0 per cent to 2.0 per cent reflecting the impact

of growth-inducement projects as well as recovery in Agriculture, Manufacturing and Mining Industries.

Over the next four quarters, average growth in the economy is expected to be within the range of 1.5 per

cent to 2.5 per cent.

tradable industries. The positive performance of

non-tradable industries represented the third

consecutive quarter of improvement. Growth

in non-tradable industries was mainly reflected

in Electricity, Gas and Water, domestic crop

production within Agriculture and Refined Petroleum

products within Manufacture.

The tradable industries recorded its eighth

consecutive quarter of expansion reflecting greater

external demand. In particular, for the September

2015 quarter, Mining & Quarrying, Transport,

Storage & Communications, as well as Hotels &

Restaurants were estimated to have expanded.

Figure 14: Real GDP Growth

(12-Month Per cent Change)

Source: STATIN and Bank of Jamaica

Figure 15: GDP Growth: Tradable vs. Non-

Tradable Industries. (12-Month Per cent Change)


- 25 -


For the September 2015 quarter, Agriculture,

Forestry & Fishing is assessed to have recorded

a second consecutive quarter of growth. The

industry’s performance reflected recovery in

domestic crop production which was partially

offset by a decline in export agriculture (see

Figure 16). With regard to domestic production,

there were estimated expansions in the output

of fruits and root crops mainly reflecting some

recovery relative to the drought period experienced

in the September 2014 quarter. The estimated

contraction in traditional export crops was mainly

driven by declines in the output of cocoa and

plantain, the impact of which was partly offset by

estimated increases in exports of bananas, coffee

and sugar.

Value added in Hotels & Restaurants is estimated

to have expanded in the September 2015 quarter at

a slower pace than average growth of 3.8 per cent

for the preceding four quarters. Notwithstanding the

deceleration in growth, this expansion represents

the tenth consecutive quarter of expansion since the

March 2013 quarter. The industry’s performance

was mainly driven by a slower growth in Hotels,

largely attributed to a deceleration in the growth

of stop-over visitor arrivals and visitor expenditure

(see Figure 17). The pace of stop-over visitor

Table 1.0: Industry Contribution to Growth

(September 2015 Quarter)

Contribution Estimated Impact on

Growth

GOODS 58.9 2.5 to 3.5

Agriculture, Forestry & Fishing 9.9 1.5 to 2.5 Mining & Quarrying 1.2 0.0 to 1.5

Manufacture 42.7 6.5 to 7.5 Construction 5.1 0.5 to 1.5 SERVICES 40.5 0.0 to 0.5

Electricity & Water Supply 7.5 0.0 to 0.5 Wholesale & Retail Trade, Repairs & Installation of Machinery & Equipment 4.7 0.0 to 0.5

Hotels & Restaurants 7.7 0.0 to 1.5

Transport Storage & Communication 7.6 0.0 to 0.5

Financing & Insurance Services 5.4 0.0 to 0.5

Real Estate, Renting & Business Activities 3.8 0.5 to 1.5

Producers of Government Services -1.0 0.0 to 0.5

Other Services 4.8 0.5 to 1.5 Financial Intermediation Services Indirectly Measured -0.6 -0.5 to 0.5

TOTAL GDP 100.0 1.0 to 2.0


Figure 16: Domestic & Export Crop Production


Source: Bank of Jamaica & Ministry of Agriculture

Figure 17: Total Stop-over Visitor Arrivals & Visitor

Expenditure. (12-Month Per cent Change)

Source: Jamaica Tourist Board

- 26 -



projects. Notwithstanding these developments,

growth in the industry slowed due to the decline in

housing starts by the National Housing Trust.

Value added for Wholesale & Retail Trade, Repairs,

Installation of Machinery & Equipment during

the review period, is primarily inferred from an

increase in manufacturing and construction related

activities. Further, growth in the industry would

have been supported by an estimated expansion

in capital goods and raw materials imports.

The estimated expansion in Electricity & Water

Supply was chiefly reflective of an increase in

electricity consumption which was partly offset

by a contraction in water production (see Figure

19). For the September 2015 quarter, higher

electricity consumption largely reflected continued

growth in residential electricity sales as households

increased their usage. The estimated fall in water

production for the review quarter reflected the

impact of drought conditions in 2015.

For the September 2015 quarter, Manufacture is

estimated to have registered its second consecutive

quarter of growth since the March 2015 quarter.

The performance of the industry primarily reflected

growth in the Other Manufacturing sub-industry.

The estimated expansion in Other Manufacturing

arrivals was inferred from a slower pace of growth

in major source markets as well as estimates of

the average daily expenditure. Value added within

the Restaurants sub-industry remained stable for

the review period.

For the review quarter, Transport, Storage &

Communication is assessed to have expanded for

the ninth consecutive quarter, albeit marginally.

This performance reflected growth in both the

Transport and Communication sub-industries.

Growth in Communication, mainly emanated from

the expansion in the provision of telecommunication

services, in particular mobile data subscriptions.

Notably, the estimated growth in Transport

largely reflected an expansion in domestic cargo

movement, albeit at a slower pace relative to the

September 2014 quarter. This sub-industry was

also impacted by the estimated growth in visitor

arrivals (see Figure 18).

Construction is assessed to have grown in

the September 2015 quarter, the eleventh

consecutive quarter of expansion. The industry’s

positive performance largely reflected increases

in commercial projects, the impact of which

was tempered by contractions in residential

construction. The continued growth of commercial

projects was associated with ongoing infrastructural

developments such as the Government’s

Major Infrastructural Development Programme,

Highway 2000, projects funded by the Tourism

Enhancement Fund as well as on-going hotel

Figure 18: Visitor Arrivals & Domestic Cargo

Movement. (12-Month Per cent change)

Source: The Port Authority of Jamaica & Jamaica Tourist Board

Figure 19: Electricity Consumption & Water

Production. (12-Month Per cent Change)

Source: Jamaica Public Service and National Water Commission

- 27 -


was mainly driven by growth in petroleum refining

reflecting recovery from disruptions in production in

the corresponding period of the previous year. For

the Food & Beverages sub-industry, expansions

were mainly reflected in Food excluding Sugar and

Alcoholic Beverages. With regard to Food excluding

Sugar, the expansion reflected an increase in the

processing of poultry meat.

Mining & Quarrying is assessed to have expanded

for the review period. The performance of the

industry was mainly driven by growth in crude

bauxite production, the impact of which was

partly offset by a marginal contraction in alumina

production (see Figure 21). The increase in bauxite

production reflected the increased capacity

utilization at one bauxite plant as well as the re-

commissioning of bauxite mining operations at

another plant. In relation to alumina production,

the output for the review period relative to the

September 2014 quarter mainly stemmed from

lower capacity utilization within the industry, arising

from disruptions in production at an alumina plant.

Aggregate Demand

Preliminary estimates of aggregate spending

indicated that Aggregated Demand continued to

strengthen. This assessment was premised on

improvements in all components of aggregate

demand for the September 2015 quarter.

With regard to the assessed expansion in Final

Consumption, both Private and Public Consumption

are estimated to have grown. The estimated

expansion in Private Consumption was inferred from

growth in real remittance inflows and total credit

card transactions (see Figure 22).This marginal

expansion in household spending was consistent

with the JCC Survey of Consumer Confidence

which reflected the continued improvement in

consumer confidence, albeit at a slower pace (see

Figure 23). For Public Consumption, the expansion

was inferred from the continued rise in non-interest

government spending during the review period. In

particular, Programmes & Wages increased at a

faster pace relative to the comparable period of

last year.

The estimated improvement in Net External Demand

occurred in the context where the contractions

in imports of goods and services outweighed

the decline in export goods and services (see

Figure 24). Of note, the reduction in imports was

attributable to an estimated contraction in the

volumes of non-fuel raw materials, the impact of

which was partly offset by a marginal expansion

in the volumes of consumer goods imports.

The performance of exports primarily reflected

contractions in citrus and alumina, partly offset by

Figure 21: Trends in Crude Bauxite, Alumina & Total

Bauxite Production. (12-Month Per cent Change)

Source: Jamaica Bauxite Institute

Figure 20: Petroleum refining. (12-Month Per cent

Change)

Source: Petrojam Ltd.

- 28 -



an expansion in the volumes of coffee, bauxite

and mineral fuel exports.

The estimated expansion in Gross Capital

Formation was mainly inferred from increased

capital and raw material goods imports as well

as greater foreign direct investment (FDI).The

expansion in FDI for the September 2015 quarter

was mainly related to infrastructural developments

such as the North-South leg of Highway 2000

as well as hotel expansion and rehabilitation.

Notably, the expansion in Gross Capital Formation

was estimated to have been tempered by the

decelerated pace of improvement in the index of

businesses’ future expectations reported by JCC’s

Business Confidence Survey.

Real Sector Outlook

Real GDP growth for FY2015/16 is projected to

remain within the range of 1.0 per cent to 2.0 per cent

while average quarterly growth over the near-term

is expected to be within the range of 1.5 to 2.5 per

cent. Further, the pace of expansion in economic

activity is expected to increase over the medium-

term. It is envisaged that growth for FY2015/16

will occur in the context of continued recovery

in the economies of Jamaica’s major trading

partners, improvements in business and consumer

confidence as well as a further improvement in

Net External Demand. Furthermore, the domestic

economy is projected to benefit from the ongoing

reforms under the IMF-EFF programme which are

expected to improve the business environment.

On balance, risks to the growth outlook are tilted

to the downside, amid uncertainty about slowing

growth in the economies of Jamaica’s major trading

partners as well as concerns about the possibility

of a further decelerations in investor expectations.

Further, unfavourable weather conditions could

mar the economic growth forecast.

Figure 22: Real Total Credit Card Transactions and

Remittances Inflows: Effects on Domestic Demand


Source: Bank of Jamaica and STATIN

Figure 23: Business and Consumer Confidence

Index (12-Month Per Cent Change)

Source: Bank of Jamaica and Jamaica Chamber of Commerce

Figure 24: Trends in Exports & Imports of Goods and Services (US$ Millions)

Source: Bank of Jamaica and STATIN

- 29 -


Box 2: Trends in selected measures of Labour

Productivity

Introduction

In the context of an increasingly interconnected

global environment, the success of Jamaica’s

economic reform programme (ERP) is hinged

on, amongst other things, its ability to enhance

its competitiveness. For a small open developing

economy, such as Jamaica, a crucial factor for

improving competitiveness is closely connected to

the country’s ability to improve overall productivity.

In general, this involves creating greater output

through enhanced allocation of production inputs

including labour, technology, energy and raw

materials. In practice, productivity increases when

a higher (or the same) level of output is produced

with the same (or fewer) resources.

Why is labour productivity important?

Higher levels of productivity are particularly

important as it is the most fundamental

determinant of the standard of living. More

specifically, increased productivity expands supply

leading to higher incomes. In turn, higher incomes

reduce poverty. Further, an increase in the overall

productivity is highly correlated with improvements

in the business environment which augurs well for

economic growth. This approach of increasing

labour productivity towards improving external

competitiveness is desirable as it improves living

standards at the same time.5

Measuring Labour Productivity

There are several ways of measuring labour

productivity. These include output per hour worked,

output per worker and unit labour cost. Notably,

productivity can be influenced by non-price factors

such as adequate business infrastructure and social

welfare, low levels of crime and bureaucracy. In

addition, strong labour relations, which involves a

harmonious relations between management and

5 There are several approaches to improving external

competitiveness including relative-price and non-price

adjustments.

employees, is known to improve productivity.

Recent Developments in Productivity

The degree of external competitiveness is illustrated

by the comparison of the level of productivity in one

country relative to another. The indices of labour

productivity as measured by the output per hour

worked shows that Jamaica’s labour productivity

has lagged behind that of the US, UK, Canada

and Europe (See Figure 1). It should be noted that

Jamaica displayed a downward trend in labour

productivity which was negatively impacted by the

global financial crisis in 2008 and has remained

relatively constant in the aftermath of the crisis. The

widening gap is indicative of losses in Jamaica’s

competitiveness vis-à-vis the US, a trend which

has slowed after the crisis. Between the June

2010 and June 2015 quarters, average quarterly

productivity per hour worked increased by 0.3 per

cent in Jamaica. This compares to increases of

0.7 per cent, 0.5 per cent, 1.1 per cent and 0.9 per

cent in US, UK, Canada and Europe, respectively.

With respect to the output per worker measure of

labour productivity, Jamaica’s productivity has

also lagged behind a set of selected countries

from Latin America and the Caribbean (See Figure

2). During the period 2010 and 2013, the average

increase in output per worker in Jamaica was

0.3 per cent. In contrast, the average increase in

productivity per worker over the same period was

0.7 per cent, 2.9 per cent, 2.4 per cent, 1.5 per

cent and 0.3 per cent in Barbados, Costa Rica,

Dominica Republic, US and Mexico respectively.

Figure 1: Labour Productivity (Output per Hour worked)

Source: International Financial Statistics database and Bank of Jamaica

- 30 -



Monetary Policy, Money and Financial Markets

Monetary Policy

During the September 2015 quarter, the Bank

of Jamaica (BOJ) reduced the signal rate, the

rate on the 30-day Certificate of Deposit (CD),

to 5.25 per cent from 5.50 per cent (see Figure

25).5 The easing of the monetary policy stance,

the second adjustment since the beginning of

the fiscal year, continued to reflect the Bank’s

outlook for lower near and medium-term

domestic inflation. Improvements in the country’s

macroeconomic conditions also supported the

decision for a further reduction in the policy rate.

Other favourable developments that supported the

lowering of the policy rate included the growth in

the net international reserves and a strengthening

5 The Bank maintained the domestic currency cash reserve and

liquid assets requirements at 12.0 per cent and 26.0 per cent,

respectively.

in the current account position of the balance of

payments.

In addition, during the review quarter, the Bank

reduced the spread relative to the 30-day CD rate

by 75 basis points (bps) for its lending facilities.

In this context, the rates on the standing liquidity

facility (SLF), bi-monthly repurchase operations

(BRO) and excess funds rate (EFR) were reduced

to 7.50 per cent, 7.00 per cent and 9.55 per cent.

The adjustment during the quarter was the third for

the fiscal year resulting in a cumulative decline of

175 bps for the fiscal year to September.

The Bank’s policy actions facilitated an easing of

the tight liquidity conditions that prevailed in the

June 2015 quarter. Liquidity was injected through

net foreign currency purchases via the Surrender

facility, net issues of repurchase agreements and

to a lesser extent, maturing OMO instruments

(see Table 6). Notably, there was an injection of

$6.9 billion via the BOJ’s repurchase operations

as institutions continued to utilize the BRO, SLF

and EFR facilities to satisfy some of their liquidity

needs. The overall Jamaica Dollar liquidity impact

of the Bank’s operations for the quarter was a net

injection of $22.2 billion relative to $13.1 billion

in the June 2015 quarter. The injection by the

BOJ’s operations for the September 2015 quarter

was partially offset by an absorption $16.4 billion

from Government’s operations, primarily due to tax

receipts.

Conclusion and Implications

Notwithstanding the focus on one factor of

production, the assessment underscores the

need for diligence in pursuing the structural

reforms embodied in the ERP as well as other

reforms geared towards improving the business

environment and overall levels of productivity.

Moreover, an active process of identifying and

eliminating impediments to the productivity of

labour, capital and technology will remain integral

to Jamaica’s economic growth prospects.

Figure 25: Interest rate on BOJ’s 30-day Certificate of

Deposit


Figure 2: Labour Productivity (Output per Worker)

Source: International Financial Statistics database and Bank of Jamaica

- 31 -


For the September 2015 quarter, the coupons on

the 3- to 7-year BOJ US dollar CDs were reduced

by an average of 12 to 26 bps. In spite of lower

rates, there was a rollover rate of 74 per cent

primarily reflecting increased placements on the

3-year instrument (see Table 7).

Money Markets

Despite the policy actions, there were periods of

tight liquidity in the private money market during

the September 2015 quarter. These periods were

partly due to a narrow distribution of funds among

banks as well as the BOJ’s intervention in the foreign

exchange market to meet increased demand

for foreign currency. In this context, the average

Table 6: BOJ Liquidity Operations

April - June 2015 July - September 2015

Injection Absorption Net Average Injection Absorption Net Average

Rate Rate (J$BN) (J$BN) (%) (J$BN) (J$BN) (%)

30-day 48.30 47.30 1.00 5.63 44.98 46.23 -1.26 5.63

365-day VR CD 6.00 3.00 3.00 6.82 6.41 1.15 5.26 6.82

548-day VR CD 0.00 0.00 0.00 0.43 0.00 0.43

729-day VR CD 0.00 3.80 -3.80 7.25 0.00 1.04 -1.04 7.25

365-day FR USD IB 0.00 0.00 0.00 0.00 0.21 -0.21

Repos (net) 0.00 19.20 -19.20 8.92 0.00 8.92 FX (Trading Room &PSE) 66.76 34.68 32.08 63.70 51.53 12.17

Net Injection 13.08 24.26 Other' 0.00 0.00 0.00 0.00 0.00

GOJ operations 88.01 107.85 -19.84 103.00 119.40 -16.40 Net Injection (All Operations) -6.76

7.86

Source: Bank of Jamaica Notes: (i) FR USD IB denotes Fixed Rate US dollar Indexed Bond (ii) Injections reflect maturities of instruments while absorptions reflect new issues of these instruments in each time period, and (iii) Average rates on VR CDs reflect average initial coupons.

Table 7: Placements & Maturities of BOJ USD Instruments

April - June 2015 July - September 2015 Placements Maturities Average Placements Maturities Average (US$MN) (US$MN) Yield (%) (US$MN) (US$MN) Yield (%) 1-year 0 19.12 2-year 10.1 0.0 - 0.0 0.0 - 3-year 11.2 0.0 3.13 74.0 0.0 2.87 4-year 12.1 0.0 - 2.5 0.0 - 4.5-year 0.0 1.6 - 0.0 97.3 - 5-year 0.0 0.0 4.16 0.5 0.0 3.95 7-year 23.1 0.0 4.69 8.7 0.0 4.57 TOTAL 56.5 1.6 85.8 116.5


overnight private money market rate and interbank

rates rose by 36 bps and 20 bps to 3.49 per cent

and 3.70 per cent, respectively. In contrast, the

average 30-day private money market rate fell by

17 bps to 6.14 per cent.

Notwithstanding the periods of tight liquidity, the

90- and 180-day Treasury bill rates both declined

by 28 bps to 6.20 per cent and 6.35 per cent,

respectively. However, the rate on the 30-day

Treasury Bill was unchanged. The performance

of the instruments reflected the continued positive

outlook for inflation and market participant’s

favourable outlook for liquidity over the near term

(see Figure 26). In particular, with the exception

of Treasury Bills, there were no other issues of

GOJ instruments in the domestic market during the

quarter.

Foreign Exchange Market

The weighted average selling rate of the Jamaica

Dollar vis-á-vis the US dollar closed the September

2015 quarter at J$119.06 = US$1.00 reflecting an

increased pace of depreciation to 5.67 per cent

from 4.26 per cent at the end of the previous

quarter (see Figures 27 and 28).The faster pace

of depreciation reflected a reversal of the trend

observed since the September 2013 quarter.

The uptick in the pace of depreciation against

the US dollar for the September 2015 quarter

occurred in the context of higher net demand for

Figure 26: Average Selected Market Interest Rates

Source: Bank of Jamaica Notes: (i) PMMR is the private money market rate (ii) O/N is the overnight rate in the market accessible by all financial institutions while the interbank rate (I/B) is the overnight rate accessible only by banks.

- 32 -



foreign currency to satisfy Balance of Payments

current account transactions (see Figure 11). The

higher net demand reflected increased payments

as well as lower receipts. Higher payments were

associated with increased demand for non-fuel

imports. Lower receipts reflected a decline in

non-traditional exports, in particular, mineral fuel

the impact of which was partly offset by higher

inflows from tourism and remittances. Private

capital inflows were also estimated to have been

lower for the same period. During the September

2015 quarter, demand pressures in the foreign

exchange market were tempered by BOJ net sales

of US$297.9 million.

There was an estimated gain of 3.3 per cent in

Jamaica’s external price competitiveness, as

measured by the real effective exchange rate

(REER) at end-September 2015, compared to

the estimated gain of 1.1 per cent at the end of

the previous quarter (see Figure 11). The gain

in competitiveness reflected the faster pace of

depreciation of the domestic currency as well

as a lower rate of domestic inflation, relative to

Jamaica’s major trading partners. Specifically,

Jamaica’s rate of inflation declined by 2.4 per

cent, in contrast to the increase of 0.4 per cent in

the weighted average inflation rate of Jamaica’s

major trading partners.

Figure 27: WASR of Select Major Currencies (e.o.p.) (12 –

month point-to-point)

Equities Market

With the exception of the Cross Listed Index, all

the Jamaica Stock Exchange (JSE) indices rose at

end-September 2015 relative to the annual change

as at end-June 2015. Notably, both the JSE Main

Index and the Junior Market Index grew by 33.3 per

cent and 49.9 per cent, respectively, for the year

ended September 2015. The outturn for the JSE

Main compared favourably to average growth of

4.1 per cent for the last five years (see Figure 29).

The performance of the equities market during

the review period reflected improved investor

sentiments. This improvement was in the context

of positive macroeconomic developments

including relatively low inflation, enhanced liquidity

conditions and the continued reduction in the

Bank’s policy rate. These positive developments

were complemented by Jamaica’s continued

positive performance under the EFF programme.

In addition to the improved investor sentiment,

higher company profit earnings by large corporates

listed on the JSE also contributed to the favourable

performance of equities. Furthermore, investments

in equities provided a more attractive option

Figure 11: The Real Effective Exchange Rate (REER), WASR and Net

Demand* (12– month point-to-point percentage change)


Notes: (i) A decline in the level of the REER (a negative change) implies an improvement in

external price competitiveness

*Net demand is referred to as the overall cash demand for balance of payments current

account transactions and is calculated as the difference between estimated current account

cash inflows and outflows.

- 33 -


relative to foreign currency and domestic money

market investments. More specifically, equities

offered a return of 33.3 per cent for the review

period, while capital gains due to depreciation on

foreign currency investments were 5.3 per cent

and interest rates in the 30-day money market

declined by 1.9 percentage points to 6.3 per cent

at end-September 2015 (see Figure 30).6

There was a general increase in the values of key

market indicators for the year ended September

2015. In particular, the value of transactions,

volume of stocks traded and number of transactions

for the main JSE Index recorded respective growth

rates of 24.4 per cent, 7.0 per cent and 5.9 per

cent (see Figure 31).

The improved outturn in the equities market was

also reflected in the advance to decline ratio which

increased to 28:3 for the year ended September

2015 relative to 8:20 for the year ended September

2014. Price appreciation was broad-based and

reflected the performance of stocks within all seven

sectors. The Communication and Financial sectors

accounted for six of the top ten advancing stocks

based on recorded average price appreciations

6 Capital gains are calculated as the 12-month point-to-point

change. Returns on equities reflect price appreciation/depreciation

and is computed based on the JSE Main Index.

Figure 29: Annual Growth of the JSE Indices


-30.0

-15.0

0.0

15.0

30.0

45.0

60.0

75.0

90.0

-30.0

-5.0

20.0

45.0

70.0

95.0

120.0

145.0

170.0

Sep

-10

De

c-1

0

Ma

r-1

1

Jun

-11

Sep

-11

De

c-1

1

Ma

r-1

2

Jun

-12

Sep

-12

De

c-1

2

Ma

r-1

3

Jun

-13

Sep

-13

De

c-1

3

Ma

r-1

4

Jun

-14

Sep

-14

De

c-1

4

Ma

r-1

5

Jun

-15

Sep

-15

ALL JA

SELECT

Crosslisted

Junior Market

JSE Combined Index

JSE Main Index (RHS)

Source: Jamaica Stock Exchange

Figure 30: Returns from Private Money Market and Gains

from JSE Main Index and Foreign Currency Investments

(Per cent)

-30.0

-10.0

10.0

30.0

50.0

Se

p-1

0

De

c-1

0

Ma

r-1

1

Jun

-11

Se

p-1

1

De

c-1

1

Ma

r-1

2

Jun

-12

Se

p-1

2

De

c-1

2

Ma

r-1

3

Jun

-13

Se

p-1

3

De

c-1

3

Ma

r-1

4

Jun

-14

Se

p-1

4

De

c-1

4

Ma

r-1

5

Jun

-15

Se

p-1

5

30-day Private Money Market Rate

12-Month Change in the Main JSE Index

12-Month Change in Foreign Currency Investments

Source: Jamaica Stock Exchange and Bank of Jamaica

of 113.1 per cent and 79.5 per cent, respectively

(see Table 8).7 Notably, only three stocks declined

for the review period (see Table 9).

7 During the September 2015 quarter, within the Communication

sector, Radio Jamaica Limited announced a proposed

amalgamation with the Gleaner Company Limited.

Figure 31: Annual Movement in Volumes, Values Traded &

Number of Transactions (Main JSE Index)


-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

Sep

-10

De

c-1

0

Ma

r-1

1

Jun

-11

Sep

-11

De

c-1

1

Ma

r-1

2

Jun

-12

Sep

-12

De

c-1

2

Ma

r-1

3

Jun

-13

Sep

-13

De

c-1

3

Ma

r-1

4

Jun

-14

Sep

-14

De

c-1

4

Ma

r-1

5

Jun

-15

Sep

-15

Volume

Values traded

No. of Transactions

Source

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